England-native Matthew Valencia joined The Economist in 1995 as a banking correspondent in London. Now, as the New York-based Wall Street Editor, he covers “all things US financial” for the weekly magazine and its Web site, including banks, hedge funds, private equity, financial services, and increasingly, regulatory and legislative issues that affect the industry. He talks to news editor Rose Gordon about his thoughts on when the economy will snap back and the future of Wall Street.

PRWeek: Everyone is making predictions about when the economy will bounce back. Do you have one?

Matthew Valencia: I think it will be a slow grind. It seems the recession is drawing to a close, which is some good news, but it's not going to bounce back in a robust way. I think we're going to see perhaps growth next year of around 1%. I think the days of growth three or four times are gone for some years. I think there's plenty more pain to come.

PRWeek: Is TARP helping?

Valencia: I think it did help stabilize the banks. I don't really buy the argument that it made a huge difference in terms of the amount of credit that was being extended. I think the banks have, by and large, used the money to stabilize themselves, rather than to lend. But, there's been a lot less demand for credit, so it's not just been a question of the banks not wanting to lend. Also, businesses have been reluctant to borrow given the depth of the recession.

PRWeek: As some banks like JP Morgan Chase post huge profits, there seems to be continued backlash from the public at those returns given the economic situation and their help via the US government. Does the business community need to do a better job explaining what's happening?

Valencia: It's something that strikes a lot of people as obscene, frankly, but of course there are two ways of looking at it. We want the financial institutions to return to profit, to be stable. If they all were making losses every quarter, that really would be a depressing situation. On the other hand, you look at the money that Goldman and JP Morgan made, and you have to say, “What's going on?”

The answer is a little bit more complicated than people think. Yes, they're making a lot of money in their investment banking businesses, in their capital markets businesses, but it doesn't seem that it's all trading their own money. What they are doing, as far as I can tell, is going into a market where a lot of their competitors have fallen by the wayside, think of Bear Stearns, Lehman Brothers, and those that have retrenched like UBS, Citigroup, Royal Bank of Scotland. There aren't that many players that have the resources to trade for their clients. A lot of what they are doing is facilitating trades that clients want to do.

In many ways, it's something that we should welcome because it's stepping in and keeping the market liquid at a time when other firms aren't really prepared to do that.

They happen to be making a lot of money on it… but the business that they are doing is not necessarily something that we should bemoan.

PRWeek: There's a regulatory mood descending on the financial community from Washington. Is there one regulation threat that you are watching right now?

Valencia: I think the one to watch is derivatives. This is such a huge market and is, or at least was, the future of finance. We have these blow ups in credit default swaps, which really soured the mood toward derivatives, and yet we have a lot of other kinds of contracts like interest rate swaps, energy and commodity derivatives, which are vitally important not just for financial firms but also for industrial companies, manufacturers, corporations that want to hedge.

There are some key changes coming. We don't know exactly what they'll be, but we have some rough ideas.

Another one is the proposed consumer protection agency, which promises to shake up the way that retail financial products are designed and sold. One thing to watch there will be the extent to which this agency tries to curtail innovation in financial products.

PRWeek: Are we going to see a Wall Street the way we knew it five years ago again?

Valencia: Well, if you look at pay, you might be drawn to conclude that Wall St is back where it was. It's almost as if the crisis was a blip. Goldman is probably going to make a record payout in terms of bonuses this year. Morgan Stanley is going to pay more than 70% of its revenues in compensation this year.

In terms of Wall Street generally, there will be big changes, there's no doubt. The regulations will bring in some major changes. I think, overall, leverage is going to be lower, risk taking is going to be more subdued.